In a 53-page decision handed down earlier this week by the California Court of Appeal, Fourth Appellate District (Division I), the Court ruled that patent settlement agreements between Bayer AG and several generic drug manufacturers did not violate the Cartwright Act – California’s antitrust law and an analogue to Section 1 of the federal Sherman Act – when Bayer settled patent infringement litigation (concerning U.S. Patent No. 4,670,444, which expired in December 2003) with respect to generic versions of its antibiotic drug CIPRO (cirprofloxacin HCl). The decision affirmed a 2009 judgment from Judge Richard E. L. Strauss of the Superior Court of California, County of San Diego, in which Judge Strauss granted motions for summary filed by Bayer and several generic drug defendants. The Court’s decision, which came out within a week of the Federal Trade Commission’s (“FTC’s”) Fiscal Year 2011 report on patent settlement agreements (see our previous post here), is yet another decision in which courts – both state and federal – have struck down antitrust challenges to patent settlement agreements (or to use the FTC’s pejorative, “pay-for-delay” agreements).

The case, styled as In re Cipro Cases I & II, was initiated in late 2000 and is a proceeding of nine coordinated cases brought by indirect CIPRO purchasers. The Plaintiffs alleged three causes of action (1) per se violation of the Cartwright Act (Bus. & Prof. Code, § 16720 et seq.); (2) unfair competition in violation of the Unfair Competition Law (“UCL”) (Bus. & Prof. Code, § 17200 et seq.); and (3) the common law tort of monopolization. We previously reported on Judge Strauss’ opinion and the appeal (see our previous posts here and here) and refer our readers to those posts for background on the case.

Among other things in their appeal, the indirect CIPRO purchasers argued that Judge Strauss adopted a flawed and highly criticized line of federal authority; namely, the U.S. Court of Appeals for the Second Circuit’s analysis in In re Tamoxifen Citrate Antitrust Litigation, 466 F.3d 187 (2d Cir. 2006), in which the Court supported the proposition “that a reverse-payment settlement between a patent holder and alleged infringer in Hatch-Waxman litigation is legal as long as the settlement does not restrain competition beyond the exclusionary scope of the patent, and there is no showing that the patent was procured by fraud or that the suit for its infringement was objectively baseless.” Instead, the indirect CIPRO purchasers contended that the CIPRO patent settlement agreements are illegal per se, and that Judge Strauss would have found them so had he not followed the Tamoxifen line of reasoning. And even if the CIPRO patent settlement agreements are not unlawful per se, “there is a triable issue of fact as to whether they violate the Cartwright Act under the ‘rule of reason applied in antitrust cases,’” according to the indirect CIPRO purchasers. The FTC has recently favored the rule of reason in an amicus brief filed with the U.S. Court of Appeals for the Third Circuit in In re K-Dur Antitrust Litigation.

Agreeing with the reasoning of the Tamoxifen Court, as well as other federal courts that have evaluated patent settlement agreements under federal antitrust laws, the California Court of Appeal concluded that such reasoning “applies equally to antitrust claims under the Cartwright Act,” under which the “illegal per se” designation “is reserved for agreements or practices that have a pernicious effect on competition and lack any redeeming virtue” (emphasis in original).

Considering the important public policies underlying patent law . . . and favoring the settlement of patent litigation . . . and the fact that the Cipro agreements did not restrain competition outside the exclusionary zone of the '444 patent, we cannot view the Cipro agreements as lacking any redeeming virtue. Accordingly, we conclude they are not unlawful per se.

Moreover, the California Court of Appeal concluded that “the Cipro agreements do not violate the Cartwright Act under [a] rule-of-reason analysis or the analysis the Eleventh Circuit Court of Appeals held to be applicable to settlements of Hatch-Waxman litigation in [Valley Drug Co. v. Geneva Pharms., Inc., 344 F.3d 1294 (11th Cir. 2003) and Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005)],” where both the per se and rule of reason analyses were found to be “ill-suited for an antitrust analysis of patent cases because they seek to determine whether the challenged conduct had an anticompetitive effect on the market.” Instead, the Eleventh Circuit said that “the proper analysis of antitrust liability requires and examination of: (1) the scope of the exclusionary potential of the patent; (2) the extent to which the agreements exceed that scope; and (3) the resulting anticompetitive effects.” Regardless, the California Court of Appeal found the reasoning of the various federal patent settlement Hatch-Waxman antitrust cases “to be sound and applicable to plaintiffs' cause of action under the Cartwright Act.” “[U]nless a patent was procured by fraud, or a suit for its enforcement was objectively baseless, a settlement of the enforcement suit does not violate the Cartwright Act if the settlement restrains competition only within the scope of the patent,” according to the Court.

The California Court of Appeal’s conclusion that Bayer and the generic defendants are not liable under the Cartwright Act for entering into the CIPRO patent settlement “is also dispositive of plaintiffs' causes of action for violation of the UCL and common law monopolization,” because it is based on the same alleged misconduct under the Cartwright Act. “Conduct that has been determined not to unreasonably restrain competition under statutory antitrust law cannot logically be deemed to unreasonably restrain competition under a common law monopolization theory.”